Global Equity Quarterly
Q1 2022
A balanced approach to a less carbon intensive future
April 2022

By the Global Equity Team

Global equity investment philosophy
Our philosophy is centred on the search for “Future Quality” in a company. Future Quality companies are those that
we believe will attain and sustain high returns on investment. ESG considerations are integral to Future Quality
investing as good companies make for good investment. The four pillars we use to assess the Future Quality
characteristics of an investment are:
Franchise – does the company have a sustainable competitive advantage?
Management – does the company make sound strategic and capital allocation decisions?
Balance Sheet – is growth appropriately financed?
Valuation – are the company’s prospects under-appreciated by the market?
We believe that investing in Future Quality companies will lead to outperformance over the full market cycle. Our
strategy is based on fundamental, bottom-up research therefore sector and country allocations are a function of stock
selection. The Global Equity strategy is a concentrated, high conviction portfolio with a high active share ratio.

Market outlook
There have been a lot of headlines in recent days about the inversion of the US yield curve and whether this is an
accurate predicter of an impending recession. Whilst a recession is not inevitable in our view, we are increasingly ofthe view that economic growth is likely to slow materially in coming months, as consumers adjust to rapidly risingcosts of human necessities such as food, heat and shelter.
The default response to decelerating growth in recent years has been more liquidity injections by central banks but
this looks much less likely this time around with fighting price inflation seen as a more pressing requirement. Federal
Reserve Policy Committee members have been lining up to deliver hawkish messages to markets in recent
weeks. Whilst it is easy to understand the Fed’s desire to at least be seen to be doing something and rebuild theirinflation-fighting credibility in the process, it could well prove easier to “talk the talk” than to “walk the walk” on thisone, given elevated debt burdens and the economic impact of increasing the cost of servicing this debt. Furthermore,
it is not clear what they can really do to bring down prices quickly. Making borrowing more expensive may dampen
speculative demand but will do little to incentivise new food or energy capacity coming onstream. In fact, its effectcould be quite the opposite.
The Fed likely has a relatively short window to at least do something. Latest polling data suggests that inflation has
become the number one topic that US voters are considering when deciding how to vote in November’s mid-term
elections. Raising rates and squeezing standards of living might be OK now, but it will cost the Fed a lot of political
capital as we move closer to polling day.
Regardless of the liquidity environment, we will not relax our requirement for rising and sustainable returns. These
remain the essential attributes of Future Quality investing. The question is how long do the rising returns have to besustained for and what does this mean for the areas we should be researching our potential investments? History

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Global Equity Quarterly

may point in the right direction, but it is important to be aware of differences that may make historical precedents
less insightful.
For instance, unprecedented debt-funded infrastructure investment in China produced a commodity super cycle inthe years following 2000 and this (allied to the aftermath of the dotcom bubble) allowed the metals and mining
sectors to outperform for seven years. There are certainly similarities today, in terms of the potential structural
demand boost for commodities like copper from energy transition and the concentration of equity market
performance in the information technology sector in recent years. However, there are some fundamental differences
too.
The most major of them are considering how much this pivot to renewable energy will cost (in monetary and resource
terms) and – just as importantly - who is going to pay for the necessary investments. Whilst China could effectively
fund its spending by issuing debt to itself, such a benign funding mechanism is not obvious for the US or EU after
years of quantitative easing and the resultant elevated debt burdens.
Passing the burden onto consumers would be one alternative to state funding, likely via a carbon tax but this tooposes some pretty fundamental issues. A World Bank Study confirmed the uncomfortable truth that energy costs a
disproportionately high amount to the least affluent in society. Further increasing inequality and fuel poverty would
be politically unacceptable in most Western democracies.
The recently launched REPowerEU 1 initiative is a good example of the potential disconnect between politicalambition and economic reality. The policy’s main ambition is removing European reliance upon Russian energy by2030. There is little mention, however, of the practical challenges that this entails. How quickly can the new energy
infrastructure be planned and delivered? How much additional steel, cement and oil will be needed to build it? Howmuch will it cost? Whilst the glossy Factsheet produced by the EU on this topic has lots of numeric targets for theenergy transition that this will necessitate, there is no mention of its resource or financial implications.
We are keen to participate in the push towards a less carbon intensive future but want to do so in a balanced fashion,
with one eye on the associated risks. One way of doing this is to prioritise more capital-light businesses who are likely
to benefit most quickly from the initial preparations for the switch. Companies whose know-how spans several of thetechnologies (from carbon capture and storage through to hydrogen and renewable energy) that address carbon
reduction are also more attractive than more focused options. Engineering and designing the new energy
infrastructure required will comfortably pre-date the actual pouring of new concrete or the laying of new copper
cable. As such, these industries are less susceptible to any weakening of political support over time.
The portfolio currently offers a blend of companies that will benefit from the strong imperative to reduce reliance
upon carbon intensive sources of energy (and the autocratic regimes that own them) and companies that will benefit
from long-term demand growth, as a result of other, more well-established multi-year themes. These include thedelivery of high-quality, cost-effective healthcare and the ongoing investment in industrial automation anddigitisation. Through investing in these areas, we are confident that we will be able to deliver high and rising returns
on investment and that this will feed through into attractive long-term returns for our clients, irrespective of nearterm macroeconomic developments or central bank policy.

1 Proposal launched by the EU in March for joint European action for more affordable, secure and sustainableenergy and to eliminate dependence on Russian gas.

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Global Equity Quarterly

Global Equity Strategy Composite Performance to March 2022
Cumulative Returns October '14 to March '22
200%
190%
180%
170%
160%
150%
140%
130%
120%
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%

164.4%

Sep-14
Dec-14Mar-15Jun-15
Sep-15
Dec-15Mar-16Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17Mar-18Jun-18
Sep-18Dec-18Mar-19Jun-19Sep-19Dec-19Mar-20Jun-20
Sep-20Dec-20Mar-21
Jun-21
Sep-21
Dec-21
Mar-22

96.6%

Nikko AM Global Equity

All Countries World Index *Nikko AM Gross Annualised Returns (USD) %1 year

2 years

3 years

5 years

Since
Inception

Global Equity Strategy Composite

4.23

30.90

17.25

16.79

13.84

All Countries World Index*

7.28

28.78

13.75

11.64

9.43

Excess Return

-3.04

2.11

3.50

5.15

4.41

*The benchmark for this composite is MSCI All Countries World Index. The benchmark was the MSCI All Countries World Index
ex AU since inception of the composite to 31 March 2016. Inception date for the composite is 01 October 2014. Returns are
based on Nikko AM’s (hereafter referred to as the “Firm”) Global Equity Strategy Composite returns. Returns for periods inexcess of 1 year are annualised. The Firm claims compliance with the Global Investment Performance Standards (GIPS ®) andhas prepared and presented this report in compliance with the GIPS. GIPS® is a registered trademark of CFA Institute. CFA
Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained
herein. Returns are US Dollar based and are calculated gross of advisory and management fees, custodial fees and withholding
taxes, but are net of transaction costs and include reinvestment of dividends and interest. Copyright © MSCI Inc. The copyrightand intellectual rights to the index displayed above are the sole property of the index provider. Any comparison to a reference
index or benchmark may have material inherent limitations and therefore should not be relied upon. To obtain a GIPS
Composite Report, please contact GIPS_inquiry@nikkoam.com. Data as of 31 March 2022.

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Global Equity Quarterly

Nikko AM Global Equity: Capability profile and available funds (as at 31 March 2022)
Available strategies

Global ACWI, Global EAFE, Global Developed, Global ex specific country, Sharia,
Dividend

Available vehicles

UCITS-SICAV, Country domiciled mutual funds, unit trusts, investment trusts andsegregated accounts

Key Features of Global ACWICurrent Positioning

Investment Objective+3% vs MSCI AC World

No. of holdings

43

40 – 50

Active share

89.5%

90 – 95%

Cash

2.0%

0 – 3%

Guidelines

Target return is an expected level of return based on certain assumptions and/or simulations taking into account the strategy’s
risk components. There can be no assurance that any stated investment objective, including target return, will be achieved andtherefore should not be relied upon. Past performance is not indicative of future performance. This is provided as supplementary
information to the performance reports prepared and presented in compliance with the Global Investment Performance Standards(GIPS®). GIPS® is a registered trademark of CFA Institute. Nikko AM Representative Global Equity account. Source: Nikko AM, FactSet.

Nikko AM Global Equity Team

This Edinburgh based team provides solutions for clients seeking global exposure. Their unique approach, acombination of Experience, Future Quality and Execution, means they are continually “joining the dots” acrossgeographies, sectors and companies, to find the opportunities that others simply don’t see.
Experience
Our five portfolio managers have an average of 25 years’ industry experience and have worked together as a Global
Equity team for eight years. Two portfolio analysts, Michael Chen and Ellie Stephenson joined in 2019 and are the firstin a new generation of talent on the path to becoming portfolio managers. The team’s deliberate flat structure fosters
individual accountability and collective responsibility. It is designed to take advantage of the diversity of backgrounds
and areas of specialisation to ensure the team can find the investment opportunities others don’t.
Future Quality
The team’s philosophy is based on the belief that investing in a portfolio of Future Quality companies will lead tooutperformance over the long term. They define Future Quality as a business that can attain and sustain high returnon investment. We believe that ESG considerations and Future Quality investments are not independent of each otherand as such the team evaluate the materiality of ESG factors when assessing the Future Quality potential of each stock.

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4Global Equity Quarterly

Execution
Effective execution is essential to fully harness Future Quality ideas in portfolios. We combine a differentiated processwith a highly collaborative culture to achieve our goal: high conviction portfolios delivering the best outcome forclients. It is this combination of extensive experience, Future Quality style and effective execution that offers acompelling and differentiated outcome for our clients.

About Nikko Asset Management
With USD 243.21 billion* under management, Nikko Asset Management is one of Asia’s largest asset managers,
providing high-conviction, active fund management across a range of Equity, Fixed Income and Multi-Asset strategies.
In addition, our complementary range of passive strategies covers more than 20 indices and includes some of Asia’s
largest exchange-traded funds (ETFs).
*Consolidated assets under management and sub-advisory of Nikko Asset Management and its subsidiaries as of 31 March 2022.

Risks
Emerging markets risk - the risk arising from political and institutional factors which make investments in emerging
markets less liquid and subject to potential difficulties in dealing, settlement, accounting and custody.
Currency risk - this exists when the strategy invests in assets denominated in a different currency. A devaluation of
the asset's currency relative to the currency of the Sub-Fund will lead to a reduction in the value of the strategy.
Operational risk - due to issues such as natural disasters, technical problems and fraud.
Liquidity risk - investments that could have a lower level of liquidity due to (extreme) market conditions or issuerspecific factors and or large redemptions of shareholders. Liquidity risk is the risk that a position in the portfolio
cannot be sold, liquidated or closed at limited cost in an adequately short time frame as required to meet liabilities of
the Strategy.

Contact us
EMEA – Nikko Asset Management Europe Ltd.
Level 5, City Tower, 40 Basinghall Street, London, EC2V 5DE, U.K.
Phone:
Email:+44 (0) 20 7796 9866
EMEAenquiries@nikkoam.com

Americas – Nikko Asset Management Americas, Inc.
605 Third Avenue, 38th Floor, New York, NY 10158, U.S.A.
Phone:
Fax:
Email:+1-212-610-6100+1-212-610-6140
USsalesinquiries@nikkoam.com

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Global Equity Quarterly

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Global Equity Quarterly

In providing a person with this document, Nikko AME is not treating that person as a client for the purposes of the
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